The Reserve Bank of India (RBI) is planning to roll out a bank-specific risk-based supervision (RBS) system from the last quarter of the financial year 2002-2003.
For the first time, the central bank will follow a carrot and stick formula for implementation of the new supervisory regime. Banks with a better compliance record and a good risk management system will be entitled to an incentive package (read lesser supervisory intervention). Those banks which fail to show improvement in response to the monitorable action plan (MAP) will be subjected to a disincentive package. This will include frequent supervisory examination and higher supervisory intervention including directions, sanctions and penalties.
The risk profile of each bank will determine the supervisory programme consisting of off-site surveillance, on-site inspections, structured meetings with banks, commissioned external audits, specific supervisory directions with close monitoring through MAP. The RBI released a discussion paper on RBS today.
This was done following recommendations of Pricewaterhouse- Coopers (PwC), a firm of consultants based in London.
Key individuals at each bank will be made accountable for each of the action points. If actions and timetable set out in the MAP are not met, RBI will consider issuing further directions to the defaulting banks and even impose sanctions and penalties.
The RBS process essentially involves continuous monitoring and evaluation of the risk profiles of the supervised institutions in relation to their business strategy and exposures.
As part of the supervision process, the RBI has called for the risk profiling of banks via CAMELS (capital, asset quality, management, earnings, liquidity and systems) rating with trends; narrative description of key risk features captured under each CAMELS component; summary of key business risks including volatility of trends in key business risk factors; MAP and bank's progress to date; strength, weaknesses, opportunities, threats (SWOT) analysis and sensitivity analysis.
The supervision cycle will vary in accordance with the risk profile of each bank, the principle being the higher the risk the shorter will be the cycle. The supervision cycle will remain at 12 months in the short-term and will be extended beyond 12 months for low risk banks at a suitable stage.
The inspections under the new approach would be largely systems based rather than laying emphasis on underlying transactions and asset valuations. The inspection would target identified high-risk areas from the supervisory perspective and focus on the effectiveness of mechanism in capturing, measuring, monitoring and controlling various risks.
RBI will make more use of external auditors as a supervisory tool by widening the range of tasks and activities in consultation with the Institute of Chartered Accountants of India.
